Introduction

Finance Act 2012 provided for the curtailment of various reliefs available to passive investors, both individuals and companies, in respect of the carry-forward of certain unused capital allowances. The raison d’être for the introduction of these provisions was motivated by the desire to extinguish the use of excessive unused capital allowances which were generated by various tax-based property incentives. The earliest date that these provisions will become effective is 31 December 2014, hence the timing of this article.

The aim is to provide some useful perspective on the provisions dealing with the guillotine of capital allowances and to highlight areas of practical difficulty in applying the new provisions, where applicable. 

We have also highlighted some points that should be borne in mind and which may assist in preserving certain unused capital allowances past the guillotine date.

General Overview

The relevant provisions dealing with the guillotine of certain capital allowances were introduced in Finance Act 2012 and provide for a termination of the carry-forward of certain unused capital allowances after the tax life of the respective building has ended. These measures only come into effect in 2015 or later.

The arrangements apply only to the various accelerated property and area-based capital allowances schemes. Other capital allowances are unaffected. Nor is the active trader affected by these new provisions, which only apply to passive investors.

With effect from 1 January 2015, any unused accelerated capital allowances which are carried forward beyond the tax life of the building or structure to which they relate are immediately lost. Essentially, this means that if the tax life has ended at any time up to the end of 2014, then the unused allowances are lost in 2015. On the other hand, if the tax life is due to end later than 2014 then the allowances are lost in the year following that in which the tax life of the building expires.

In the unlikely event that a balancing charge arises on a disposal of the building in question(for example, after the expiration of the tax life of that building), then the unused capital allowances carried forward, which would otherwise be subject to the guillotine provisions as detailed above, can be offset against any balancing charge arising. 

It should be noted that any unused capital allowances that are carried forward purely by virtue of the application of the high earners’ restriction to the individuals concerned are not within the scope of these provisions and can therefore continue to be carried forward indefinitely. 

Deloitte Perspective

As noted above, these guillotine provisions will become effective from the end of December 2014 and should be kept in mind by investors who have availed of accelerated property or area-based allowances in a non-trading context. 

From a simple compliance viewpoint, the application of these provisions is potentially extremely complex, with no clear guidance available in relation to the make-up of carried-forward reliefs and the order in which each component of this pool of carried forward reliefs should be treated as utilised. This is obviously relevant to the provisions dealing with the guillotine of capital allowances as it will be necessary to determine the quantum of the allowances within the scope of the guillotine provisions which continue to be carried forward beyond the calendar year 2014 or the expiration of the tax life of the relevant building (where later than 2014). 

Therefore, our strong recommendation would be that clients who may have a claim to such capital allowances should carry out a detailed review of all capital allowances carried forward with a view to determining the quantum that may be affected by the guillotine provisions. It will be important that any allowances carried forward are utilised on a ‘just and reasonable basis’, which is supportable in the event of a Revenue challenge in relation to the application of the guillotine provisions.

The specific wording contained in the guillotine provisions may provide affected taxpayers with some scope to take steps now to preserve at least a portion of unused capital allowances which would otherwise be subject to the guillotine provisions.

As noted above, the guillotine provisions do not impact on unused capital allowances which are carried forward purely by virtue of the high earners’ restriction. This is an interesting dynamic to the guillotine provisions which should be borne in mind in determining the impact of same.

Next Steps

The guillotine of certain capital allowances will take effect starting in 2015. There are considerable practical difficulties that may arise in determining the impact of same, as noted above, with a detailed analysis of all capital allowances carried forward being required in a lot of situations common to taxpayers with certain unused capital allowances. 

Your Deloitte adviser is available to assist you in understanding the impact of the guillotine provisions on your future tax position and to discuss possible steps that can be taken now to help you utilise any available capital allowances.